Chapter 25: Monopolistic Competition and Oligopoly

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Chapter 25 Monopolistic Competition and
Oligopoly

• Content and Visuals from McConnell/Brues
  Economics

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Overview

• Market powernumber of firms
• Two in the middle
• Game theoryyour choice is based on theirs

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Its all about the numbers

• The biggest thing that will determine your amount
  of market power is the number of competitors you
  face
• Already discussed perfect competitors and
  monopolists as the extremes
• Other two come in between

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Monopolistic Competition

• Which word is more important?
• COMPETITION
• Very similar to perfect competition except
  PRODUCTS ARE NOT IDENTICALslight differences
  exist
• Still have large number of firms, easy
  entry/exit, and little market power
• Slight difference in product

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Differences price change

• As a MC, businesses have a little control over
  price based on the slight product differences
• Product attributes, service, location, brand
  name, packaging, etc.
• No enough to validate a great difference in
  price, but a little is expected

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What examples do we see?

• Think about the products you buyhow many of them
  fit this description?
• What are they?

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Effect on Profit

• Since can affect the price, face downward sloping
  demandmuch closer to PC though
• Still use MRMC but will not make much, if any,
  economic profit

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Why?

• As an imperfect competitor, why cant they make a
  lot of profit?
• Since it is very close to PC, any sizable profit
  will encourage others to join that industry
• Short-run profit is possible, but not long-run

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Also not efficient

• Since it is imperfect, MC will not result in
  complete efficiency (allocative-PMC or
  productive-Pmin ATC)
• Will be much closer though
• Choosing to restrict output results in EXCESS
  CAPACITYdifference between actual production and
  max capacity

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Oligopoly

• Closer to the monopoly side
• Few LARGE firms that dominate a market
• Lots of market power, act as PRICE MAKER, but
  also base decisions on competitors

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How big is big?

• Typically oligopolies contain 3-12 competing
  firms
• The less there are, the more power they share
• CONCENTRATION RATIOmeasure of the combined power
  held by the largest firms (typically 4 biggest)
• What examples do we see?

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Another weird word

• HERFINDAHL INDEXanother measure of market
  concentration
• Instead of combining big firms together (book
  example of Pepsi/Coke vs Microsoft/Apple),
  calculated by adding the square of all firms
  market powers
• BIGGER THE NUMBER, THE MORE CONCENTRATED THE
  INDUSTRY

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Sizable market power

• Having a lot of power gives you the ability to
  influence the price
• What determines your own decisions morewhat is
  good for you or what you thing the other guy will
  do?
• Other guy

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Game Theory

• Idea that has foundation in political arena
• Great to look for your own best personal outcome,
  but need to consider what you think your
  opponent will do
• Base your decision on the best possible outcome
  of their decision

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What does that mean?

• Classic example is the PRISONERS DILEMMA
• http//plato.stanford.edu/entries/prisoner-dilemma
  /
• http//william-king.www.drexel.edu/top/eco/game/IT
  1.html
• http//serendip.brynmawr.edu/playground/pd.html

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Cooperate or Compete?

• Only have 2 choiceswhich do you choose?
• Typically face a kinked demand curve
• If everyone raises price everybody gains
• If only one does the other person gains alot
• If neither do, both remain the same

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Price wars or Price fixing?

• Should you use PRICE WARS or PRICE FIXING?
• Depends on cooperate of all involved
• If all go along then price fixing
• If wont then use price wars

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Illegal in US

• Technically CARTELS (formal agreement) like this
  are illegal in the US
• OPEC
• TACIT UNDERSTANDINGS are impossible to stop
• If I happen to raise my price and you do to its
  merely coincidental but we both benefit

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Dont want to compete

• Monopolists do not competeoligopolies are
  monopolist wanna-bes
• Do not change price, but instead try to woo
  customers with quality and advertising
• Less efficient than MC, but more than monopolies

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Overview

• Market power profit
• Market power less efficiency
• M -- O -- MC PC
• Know the graphsknow the basic principles